When Lightning Strikes: Living With Bankruptcy

What are the real costs of entrepreneurship when the business you founded, and loved, hits the rocks.

September 12, 2016

One Sunday afternoon in January, a 39-year-old statuesque blue-eyed blond wearing sneakers and a “No Fear” T-shirt stood on the sidewalk outside her retail store and watched her life’s work get carted away. For the sake of her privacy, let’s call her Tara and her store The Happy Gourmet.On a normal day, The Happy Gourmet would’ve been packed with local-food advocates opening their wallets to buy produce, meats, and cheese produced by local farmers and food artisans. Instead, it was filled with tool-bearing bargain hunters gruffly dismantling anything worth taking, including wall-mounted vintage shelves and antique tin-roof tiles. They carted away café tables, blackboards, display cases, electronic scales and freezers. People out for a Sunday stroll along Main Street saw the action and joined the fray, stuffing shopping bags with hard-to-source gourmet goods, decorations, napkins and even the small encaustic paintings of garlic and peppers, which were gifted to Tara by a local artist as an opening present three years earlier. Everything was being sold off at “best offer” prices. Cash only.

On a normal day, The Happy Gourmet would’ve been packed with local-food advocates opening their wallets to buy produce, meats, and cheese produced by local farmers and food artisans. Instead, it was filled with tool-bearing bargain hunters gruffly dismantling anything worth taking, including wall-mounted vintage shelves and antique tin-roof tiles. They carted away café tables, blackboards, display cases, electronic scales and freezers. People out for a Sunday stroll along Main Street saw the action and joined the fray, stuffing shopping bags with hard-to-source gourmet goods, decorations, napkins and even the small encaustic paintings of garlic and peppers, which were gifted to Tara by a local artist as an opening present three years earlier. Everything was being sold off at “best offer” prices. Cash only.

With the poise of a front-of-house restaurant manager, Tara oversaw the very public dismantling of her cherished business.

“How much for this shrink-wrap machine?” John, a regular customer, asked.

“Whatever you want to give me for it, John!” she replied, offering a wide smile, if a little forced.

He gave her $20. They hugged. She said, “See you soon,” and watched him drive away. Then, for the first time that day, she cracked. In tears, she walked down the street for a block or two to collect herself, then returned to the scene where friends and familiar customers continued to cart away her enterprise.

Everything she had built over the past 20 years—her dream business, reputation, professional credentials, celebrated status in the community for providing five full-time positions and contributions to the local economy through her procurement policy of buying local—was gone in less than three hours.

Tara’s business was wiped out by the 2008 global financial meltdown, along with over 3,000 other Canadian enterprises (3.1 per cent of all enterprises in Canada). Incorporating does not protect small business owners. The fact is, most small businesses are primarily financed by a combination of personal savings, credit card debt, plus business lines of credit backed by founder personal guarantees and assets like home equity or retirement savings, which means business debt is also personal debt. Incorporation status does not shield you from having to make loan or creditor payments in these cases. Furthermore, in those tight credit times, banks were pulling loans, not approving them, and Tara did not have the personal financial resources to obtain more credit to carry her business through the downturn. She says emphatically, “I didn’t want to go bankrupt.” However, her advisors looked at the books and short-term outlook and agreed it was the best course of action. Tara was caught, like so many others that year, with a dollar-store umbrella in a Wall Street storm.

Filing for personal bankruptcy took her a day. And typically, “clearing the deck” takes approximately nine months. However, getting out from under the related business bankruptcy process under Canadian law, in her case, which involved liquidating company assets, and paying back business creditors with an agreed upon amount with post entrepreneur job earnings, will take up to five years. Incredibly, it then takes an additional six years to restore her credit history. For Tara, that means it will take her 13 years to get a fresh start.

Conor O’Neill, an insolvency lawyer at Fasken Martineau, says under Canadian law it’s particularly difficult to rebuild your reputation and expunge the blight on your financial record after bankruptcy. “I know a very accomplished professional woman in her mid-40s who had just applied for a high-level corporate director’s position,” he says. “The company did a background check and learned that she had filed for personal bankruptcy 20 years ago. It was still on her record. These days, most corporate and even non-profit bylaws stipulate that directors cannot have ever declared personal bankruptcy. No one wants a director on their board who is perceived to have mismanaged money. She didn’t get the appointment.”

Andy Fisher, a partner in the insolvency and restructuring practice at Farber Financial Group in Toronto, says the way Canada deals with business-related bankruptcy is getting better. “Things have started to noticeably change since 2008,” says Fisher. First, the banks are less and less aggressive about pushing business owners into bankruptcy, since many had to provide personal guarantees to secure their start-up loan. Instead, they are encouraging founders to pursue long-term repayment plans known as a Division 1 proposals (if you owe more than $250,000) or Consumer proposals (if you owe less).

Chad Kopach, a litigation lawyer and partner at Blaney McMurtry LLP, agrees. “Canadian business owners are also getting more proactive in working with their lenders to work out a reasonable solution,” he says. “In a proposal scenario (similar to Chapter 11 and Chapter 13 in the U.S.), unsecured lenders will get some [money]. In a bankruptcy (Chapter 7 in the U.S.), they get none. It’s an easy choice if you are a numbers person.”

However, the proposal option only works if you have some money left to distribute on judgment day (the day the court decides how much you have to pay back, the conditions and when you may be discharged) or have prospects of getting a reliable job and income in short order. For many business owners, their business is their job. Many entrepreneurs, especially women, start businesses because they have experienced employment barriers or pay equity issues in the past, so finding a new, well-paying job that covers living expenses plus paying off business creditors at a set amount for the next five years is no easy feat.

Is there any upside? Fisher notes that for many, filing for bankruptcy is often the only and best way to get a new start for those deep in a financial hole that they might otherwise never be able to climb out of, and that in many cases the discharge process takes 12 to 18 months if there are no complications. He also says, “While it is not uncommon for people who have gone bankrupt to feel embarrassed, they shouldn’t. I’m certain that everyone who reads this article has a friend or family member who has either gone bankrupt or filed a proposal. We had a couple who went bankrupt. They went to a dinner party. Going to the dinner party, they thought they were the only people at the party that had gone bankrupt. At the end of the party, they found out that all four couples at the party had gone bankrupt or done a Consumer proposal.”

Consumer proposals have indeed been on the rise over the past five years and are increasingly seen as a better alternative to bankruptcy by both debtors and creditors.

However, Elizabeth Warren, author of the 2002 Harvard Law School study “What is a women’s issue? Bankruptcy, Commercial Law, an Other Gender-Neutral Topics”, casts dispersions on the bankruptcy industry’s effort to market bankruptcy as completely normal, as if “the courts are overflowing with people who deliberately shrug off their debts as easily as they shrug off an old overcoat.” In her view, it smacks of moral degeneracy.

Is Bankruptcy a Women’s Issue?

Studies show that four of the top causes of business bankruptcy in North America are undercapitalization, management inexperience, over-extension of credit and economic conditions or recessions. Furthermore, typically women-dominated industries, which women entrepreneurs also often gravitate to, including retail, accommodation and food industries, tend to top the list when it comes to high bankruptcy rates.

A continued look at gender and bankruptcy research suggests that bankruptcy, especially small business bankruptcy, is indeed a women’s issue. In North America, women are attempting entrepreneurship at unprecedented rates, despite the additional gender-specific challenges. Some women are opportunity-driven, others are driven by glass ceilings and sexism in corporate environments, financial necessity or because they see entrepreneurship as the best way to tackle the pesky and enduring gender pay gap. While the number of female founders grows at double-digit rates, evidence also shows that North American women entrepreneurs face reduced access to investment and commercial loan capital, resulting in a higher level of reliance on credit cards and personal savings to start their ventures. If five to 80 per cent of new ventures fail within the first five years, and if women entrepreneurs statistically take on more personal debt and financial risk to start their ventures, then it stands to reason that women entrepreneurs could be at higher risk for bankruptcies than their male counterparts.

Warren’s research paper, which focuses on personal bankruptcy, notes that “the number of women filing for bankruptcy is increasing at an alarming rate, and that the distribution of those in bankruptcy is shifting, from decidedly male in the 1980s to decided female in the 2000s”. Interestingly, this increase coincides with the dramatic increase in the number of female entrepreneurs over the same period.

When the Process Does More Harm Than the Credit Rating

The time it takes to be completely cleared of a bankruptcy, plus make repayments for several years is hard enough, but Tara says the process, what she has to endure while under bankruptcy and how she feels about having to do so is arguably even worse.

Once her business declared bankruptcy, Tara was required by law to hire and pay for a trustee. Trustee fees are governed by law, but generally involve a $750 one-time fee plus 20 per cent of any money collected. The trustee gets paid first, and whatever is left each month goes to the creditors. For the duration of her financial purgatory years, Tara’s trustee acted as a sort of financial parole officer. Tara is thankful that her trustee is respectful; still, she has to meet with him regularly to review her income and spending—in coffee-cups-per-day detail. If she earns more than $2,100 per month in gross income or approximately $25,300 annually (just above the regional poverty line of $19,930), which is the maximum allowed under bankruptcy law, she has to write him a cheque for the excess. She faces questions like, “Couldn’t your friend have paid for dinner?” and “Can’t you find a cheaper hairdresser or maybe use drugstore colour?” She even has to declare cash gifts from friends and family, and if it pushes her over her minimum allowance, it also gets appropriated. She had to forfeit her credit cards on day one and is barred from securing any type of credit until she’s discharged. If she is offered even a department store card and it is accepted, she could be jailed.

Five years into Tara’s bankruptcy term, her car broke down and was beyond repair. She was desperate for a loan and surprisingly, her trustee approved her loan application. However, the interest rate offered by the only willing lender was 29 per cent annually, a typical rate for “high credit risk” customers. She turned it down. She is now borrowing a car from a family member.

Overall, the experience has been, in Tara’s words, “humiliating and devastating psychologically.” She says, “For the first year I felt really raw. I developed a real fear of people. I didn’t want to go out, go anywhere, or talk to anyone. I felt shame. Panic. Utter fear.” She recalls how close friends were quick to knock her off their guest lists. Her European immigrant parents were ashamed. Her seven-year-old daughter endured teasing from classmates. Personal bankruptcies are easier to hide; but prominent business-related personal bankruptcies, not so much.

Researchers in the entrepreneurship space would not be surprised by Tara’s emotions. Canadians are smitten with the idea of entrepreneurship as a career choice, but are also known to have a strong cultural aversion to failure and those who are perceived to have failed. Not a good combination for a nation that seeks to be a global leader in the innovation and entrepreneurship space.

It’s been six years since the closing of her dream business. Tara has one year to go before her payback terms are fulfilled. Heroically, she rebuilt her professional life and now teaches full-time at a chef school at a local college. She was recently promoted to department coordinator. Her students love her grit and real-life experience. They learn more from her than just cooking. In turn, Tara believes sharing what she has been through, the good parts and the bad has made her both a better teacher and accelerated her own healing. She has also taken up jiu-jitsu, where falling down and getting up is part of the drill. However, she still avoids socialising outside of work and is deeply wary of ever starting a business again.

“The pull is still there and probably always will be,” she says. “I can’t walk by a storefront for lease without dreaming. Deep down, I guess I am still an entrepreneur. But there is no way I am going there again anytime soon.”

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